Is it wise to panic in a crashing stock market?

Indian stock market has been on a tizzy over the last one month. From a high of 39000, Sensex has come down sliding to 34500 in less than 20 sessions.

It reminds us of the times of 1992, 2000 and 2008 when the average man on the street entered Dalal Street and burnt his fingers.

The question being asked these days is not that have you invested in the stock market, but have you exited before the crash last week?

Joe Kennedy In The Stock Market

Let’s recall the famous story of Joe Kennedy, father of John F Kennedy. Joe was very active investing in stock market in 1920s, and has been making money. Market was going up, up and up, and he was making money day after day, like most of the investors.

The ‘doomsday predictors’ had been predicting a market crash all the way from 1925, but nothing was happening except occasional volatility. A sensible investor, Joe was getting worried. But he found no reason to exit completely, except making occasional profit booking.

Then on October 23, Wednesday Joe was rushing to the Wall Street in the morning when he suddenly noticed that his shoes needed a coat of polish. He stopped at the nearby shoe shining boy, stretched his legs to the boy, and unfolded the day’s newspaper as the boy began polishing the shoes.

Realizing that Joe was reading the Stock Market section of the newspaper, the shoe shining boy picked up a conversation with him on shares. He began giving tips to Joe on what stocks to buy, what stocks to exit, and which ones will give better returns.

Joe was stunned for a moment, and asked the boy how does he know all these. He replied that he too invests in the market and is sitting on a fortune going by the value of his shares. Joe was speechless, knowing the extent the Wall Street activities have percolated.

Once his pair of shoes polished, Joe rushed to the Wall Street and sold all his holdings before the close of the day. And he was out – all in few hours.

The next day was October 24, 1929. Otherwise known as the ‘Black Thursday.’

Thereafter, he is famously known for his quote on the market crash. “Once the shoeshine boys have tips, the market is too popular for its own good.” 

Stock Tip From Shoeshine Boy

Shoeshine boy, taxi driver, barber, beggar, cleaner, house help, car washer, neighborhood grocer are all very enterprising people looking out to make money in innovative ways. If you ever get stock market tips from them, beware. Beware of the stock market.

Listen in to Bernard Baruch, famous American financier and stock investor of yesteryears, who described the scene before the 1929 Black Thursday. “Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely”. 

Common sense tells you to get out of the market when you come across such cues. When the profitability of the stock market is so common, and people are not worried about the risk involved in the capital market, and the man on the street is so oblivious of the risk of the market, it is time to exit from the market. Exit completely.

But unfortunately, only one emotion often prevails over common sense. It’s called greed.

Equity of Equity Market

To be fair, when mayhem kicks off in the street, it gets unsavory not just with the average investor, it catches up even with the most intelligent ones. 

Look at what happened to India’s most seasoned investor whose portfolio value used to be over Rs 20,000 crore. Rakesh Jhunjhunwala, who is known for holding on to his investments for years, has seen his portfolio value nose dive by 75 per cent in the last few sessions. Remember he built up his trading empire from $100 to $2.5 billion. Still he couldn’t escape the blood bath on the street.

Charlie Chaplin & Black Thursday

But there are good examples to follow. Look at the gem who did it wisely. Charlie Chaplin exited the market well ahead – two years ahead of the Black Thursday. And he probably would have lost 80 per cent value, had he continued with his holdings till the 1929 October high.

Much after disposing his holdings, he once caught up with his friend and songwriter Irving Berlin for a dinner. It was October 23, 1929 and he advised Berlin to exit from the market as the signals were not so good. Chaplin recommended Berlin to get out immediately and mentioned to him that he had done so two years ago.

Berlin refused to find reason and decided to stay on. The very next day, Black Thursday, he realized the wisdom in Chaplin’s advice. His investment came down by 74 per cent in value. His $2 million had almost come down to half a million.

However, there is a positive twist to Berlin’s story. He did not liquidate the stocks any time thereafter. By 1945, his investments gained 60 per cent and 10 years later his investment gains were 700 per cent. By the time of Berlin’s death in 1989, his original $2 million investment had grown to $1.1 billion. What Berlin did wisely was that he invested mostly in blue chip stocks of the time. 

And that’s precisely why the market pundits will tell you to ‘buy and hold’ when the markets tank. Remember the bear market that followed the 2008 crash, the average US stock shed nearly 60 per cent of its value.

Other than Warren Buffett, investors indulging in buying and holding were few. Indeed, a widely-expressed view among the investment advisors around that time was that “buy and hold” was long dead.

The Last Man Enters The Market

It would be wise to understand that the market follows a cycle. A cycle to trick people who have spare money. From ultra rich to rich, to middle class, to lower middle class and finally to the man on the street.

When the last man on the street is tricked into, one cycle is complete. The next cycle can only start from the bottom and with a blood bath similar to a war, where huge casualty is inflicted on the innocent. 

A heated up market, always goes by building the noise to reach out to the gullible, naive man on the street and trick him to buying stocks. By the time, he enters the market, what he can afford to buy would be penny stocks. In the pepped up greed, he would invest his life savings in unknown companies’ stocks which would go wash out in the impending crash.

Most of the penny stock promoters and traders of such stocks would be waiting like a leopard in the bush for the credulous, uninitiated to get into the market to cash in their investments with huge returns. You will never see those stocks in the markets after the mayhem. 

Having burnt fingers by putting their savings in penny stocks which disappeared in the crash, the poor victims of the crash shuns the market till another boom. This is a cycle. This keeps happening every eight to 10-year periods.

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Disclaimer: Views expressed in the article are personal views and not in any manner to be construed as its author’s employer’s or Indian IT Industry’s views.